Why There’s a Sea Change in Platinum and Palladium Markets

Platinum and palladium prices touched highs in February not seen since late summer 2011. Palladium in particular has seen a significant price rally since November 2012 that culminated in the metal trading above the $770 per ounce mark in February. While prices have eased since early February, they are still nearly 15 percent and 40 percent higher than the mid-2012 levels for platinum and palladium respectively.

The changes are taking place with the backdrop of worsening supply side concerns and greater optimism in the market regarding the economic outlook. The cyclical industrial applications for Platinum Group Metals (PGMs) and growing demand from the automotive sector in emerging economies such as China and India combined with the limited supply pool for these metals makes the PGM markets particularly vulnerable to dramatic shifts in the demand-supply balance as seen over the course of the past eight months. That was evident when the tragic crisis in South Africa’s mining sector late last summer had sparked off deep supply-side concerns in the market that propelled platinum prices to breach the $1,700 mark in mid-September. Similarly, worries about dwindling palladium supplies in Russia amid signs of a pick-up in global automobile sales fuelled a surge in palladium prices since last November.

PGMs play an important role in the global metals markets and have crucial applications as industrial commodities as well as in jewellery manufacture. The largest industrial use for PGMs is in automotive catalysts though with platinum being the preferred metal for diesel after-treatment and palladium finding use mostly in gasoline catalysts (although palladium is finding increasing use in diesel catalysts). These metals also see widespread use in other industrial sectors, but palladium is certainly the more industrial metal amongst the two as platinum dominates when it comes to jewellery. Although PGMs have a wide variety of demand-side drivers, production of these metals is concentrated in just two countries – South Africa and Russia. South Africa accounts for almost 75 percent of the world’s platinum supply, whereas 40 percent of the world’s palladium supply comes from Russia.

Platinum Demand by Application Type

Source: Hightower Report

Platinum Demand by Region

Source: Hightower Report

The uncertainties in the PGM markets are looking more than likely to continue as looming supply constraints, more stringent pollution control standards, demand growth in emerging economies, and growing investment demand set the stage for recurring price fluctuations. In the latest run up in trading, the NYMEX PGM contracts have established their place as the global benchmarks.

NYMEX platinum and palladium futures, the oldest contracts on the exchange having been launched in 1956 and 1968 respectively, now represent close to 80 percent of trading volumes in the PGM futures market. A little more than three years ago, the NYMEX PGM markets accounted for less than half of all futures volumes traded. Some reasons that new entrants to the market are coming to NYMEX to trade include the flexibility provided by multiple trading venues that includes our open outcry markets in New York, electronic trading on CME Globex and OTC clearing services via CME ClearPort. This matched with the increasing liquidity in our markets makes for an enhanced trading experience.

Throughout the fall and winter, we have seen record trading activity and increasing open interest levels in the NYMEX PGM markets. Platinum futures volumes across January and February were up more than 70 percent compared to the same period last year, while January saw the highest ever trading volume for platinum options with over 35,000 contracts changing hands. Similarly, we had the highest trading volumes for the palladium contracts in February with nearly 200,000 and 20,000 lots traded for palladium futures and options respectively.

Furthermore, it is not just about increasing trading volumes when it comes to assessing market quality but also open interest and longer term position taking in the market. In that respect, we have had remarkable success as aggregate open interest for PGM futures breached the 100,000 level for the first time ever in January, up more than 60 percent compared to the same period last year.

Monthly Volume and Open Interest for NYMEX Platinum and Palladium Futures:

Regardless of who is trading where, and for what reason, there doesn’t appear to be any signs that volatility in the PGM market is going away this year. Demands on the market continue to be great – and if supply shortages continue, we can expect market participants, especially those in the PGM supply chain, to continue looking to the NYMEX PGM markets to manage the pressures of increased volatility.

Connect

About OpenMarkets

About OpenMarkets

OPENMARKETS online magazine, produced by CME Group, is designed to keep you up-to-date on developments that can enhance your successful participation in the dynamic derivatives industry. The magazine features customer case histories, new product information, technology updates, trend stories, and timely online-only news briefs.

About CME Group

About CME Group

As the world’s leading and most diverse derivatives marketplace, CME Group is where the world comes to manage risk. CME Group exchanges offer the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather and real estate. CME Group brings buyers and sellers together through the CME Globex electronic trading platform and trading facilities in New York and Chicago. CME Group also operates CME Clearing, one of the largest central counterparty clearing services in the world, which provides clearing and settlement services for exchange-traded contracts, as well as for over-the-counter derivatives transactions through CME ClearPort.